When financing your home purchase, it’s always nice to know your options— after all, this is likely one of the most significant financial decisions you’ll make in your lifetime. You’re probably familiar with the typical retail mortgages that you can obtain from most credit unions or banks, but are you familiar with correspondent lending?
In this article, we’ll dive into the ins and outs of correspondent lending and answer questions like:
- What is a correspondent lender?
- How does a homebuyer work with a correspondent lender?
- What are the advantages and disadvantages of a correspondent loan?
- How are correspondent lenders and mortgage brokers different?
What Is a Correspondent Lender?
A correspondent lender is a unique type of lender that originates, underwrites, and funds a mortgage loan using their name. The correspondent lender will then sell the loan to a larger mortgage lender, who becomes the loan servicer. The loan servicer will be the entity in charge of collecting the monthly payments. The institution that bought the mortgage may turn around and sell it once more on the secondary market, often to a large aggregator like Freddie Mac or Fannie Mae.
The correspondent lender funds the loan themselves. Unless they have that large amount of cash on hand, the correspondent lender will typically get their funds from what is called a warehouse line. Warehouse lines are simply lines of credit used by mortgage bankers. They allow them to take out significant sums of money to fund the correspondent loan and pay back their debt once another entity buys the loan.
You might be wondering who buys these correspondent loans? The same credit unions, banks, and other financial institutions that lend directly to consumers also purchase loans from correspondent lenders. This means that you can take out a loan with a correspondent lender, but a credit union could obtain your loan on the secondary market and become your servicer. By the time they purchase the loan, all of the hard work of the origination process is complete.
How Does a Homebuyer Work with a Correspondent Lender?
To illustrate how this type of loan works, let’s take a look at how the correspondent loan process would play out.
You’ve finally found your dream home. Congrats! You’ll need to take out a mortgage for $300,000, so, like any loan, you begin the process with an application. You’ll go through the typical approval process, but once you’re approved, the correspondent lender funds the mortgage using a warehouse line of credit.
After closing, Credit Union X decides to purchase your loan. The money from the sale will be used to pay off what the correspondent lender borrowed on the warehouse line. Your loan servicer is now Credit Union X, and you’ll make all of your monthly mortgage payments out to them.
What Are the Advantages and Disadvantages of a Correspondent Loan?
Working with a correspondent lender comes with a unique set of advantages that combines some of the best aspects of other lending options.
- Work directly with the lender. This is an advantage that other lending options like mortgage brokers don’t offer. Mortgage brokers are bound by the guidelines set by the lender; they have no discretion to waive any requirements or qualifications. However, if you work with a correspondent lender, they have the flexibility to make exceptions to individual requirements. The bottom line is that it helps to be able to communicate with the person or institution putting the money in your hand.
- Faster turnaround. Because correspondent lenders generally handle their underwriting and loan approval in-house, they have greater control than other options like a mortgage broker. This leads to faster turnaround speeds.
- More mortgage options. By working with a correspondent lender, you open up your mortgage options. Direct lenders that don’t sell their loans on the secondary market may be confined to just one or two types of mortgages. Correspondent loans, however, are only limited by what investors are prepared to purchase. The more investors a correspondent lender works with, the more choices available to you.
But like any form of financing, correspondent lending is not without a downside:
- Must conform to the servicing lender’s standards. Correspondent loans must be underwritten to the investor or servicer’s standards. If there are any issues and the lender deems that the mortgage is not up to standard, the loan will be sent back to the correspondent lender. Spending time and money remedying a problem like that can be a hassle.
How Are Correspondent Lenders and Mortgage Brokers Different?
You’ll find some similarities between using a mortgage broker and a correspondent lender, and, in a way, correspondent lenders are seen as a halfway between a traditional direct lender and a mortgage broker. They lend the funds like a traditional lender but also shop your mortgage around similar to the way a mortgage broker operates.
Making the Loan
The most significant difference between the two finance options is that correspondent lenders make the initial loan directly while mortgage brokers match up a lender and a borrower, but don’t disburse any funds.
Correspondent lenders will charge a fee, but because the mortgage is issued in their name, they don’t have to disclose the amount. Brokers, however, must report any fees to the borrower when the mortgage is settled.
Credit Unions as Correspondents
Correspondent lenders aren’t just individual lenders. Many credit unions act as correspondents themselves. Once the mortgage is closed, the credit union will sell the notes to other larger lenders. This transaction gives them the capital to continue issuing mortgages to other borrowers.
Whether a correspondent lender is the right choice for you depends on your unique financial situation. As with any loan or lender, it never hurts to do a little research on your own. Don’t be afraid to ask questions, research your choices, and compare rates to ensure that you’re getting a fair deal.